And that's, I think, my first memory of understanding how big the world was. And then, flying there and landing. This was only maybe a year, or even less than a year, after an enormous coup, the military coup in which we learned later that over half-a-million people had probably died.

But it was for me, as a young boy, a magical place. And I think that probably is when it first enters into my consciousness that this is a big world. There are a lot of countries, a lot of cultures. It's a complicated place.

ZAKARIA: But you were an American in Indonesia. How did that make you feel?

OBAMA: Well, you know, it made me realize what an enormous privilege it is to be an American. I mean, it certainly was at that time, even more so, because the gap in the wealth of the West at the time compared to the East was much wider.

But it wasn't simply the fact that my mother was being paid in dollars by the U.S. Embassy, and so, that gave us some additional comfort.

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It was also becoming aware that, for example, the generals in Indonesia or members of Suharto's family were living in lavish mansions, and the sense that government wasn't always working for the people, but was working for insiders -- not that that didn't happen in the United States, but at least the sense that there was a civil society and rules of law that had to be abided by.

My stepfather was essentially dragged out of the university he'd been studying in in Hawaii, and was conscripted and sent to New Guinea. And when he was first conscripted, he didn't know whether he was going to be jailed, killed -- that sense of arbitrariness of government power.

Those were the things that you felt you were protected from as an American, and made me, as I got older, appreciate America that much more.

ZAKARIA: Why did you major in international affairs?

OBAMA: Well, obviously, having lived overseas and having lived in Hawaii, having a mother who was a specialist in international development, who worked -- was one of the early practitioners of microfinancing, and would go to villages in South Asia and Africa and Southeast Asia, helping women buy a loom or a sewing machine or a milk cow, to be able to enter into the economy -- it was natural for me, I think, to be interested in international affairs.

The Vietnam War had drawn to a close when I was fairly young. And so, that wasn't formative for me in the way it was, I think, for an earlier generation.

The Cold War, though, still loomed large. And I thought that both my interest in what was then called the Third World and development there, as well as my interest in issues like nuclear proliferation and policy, that I thought that I might end up going into some sort of international work at some point in my life.

ZAKARIA: Do you believe, when looking at the world today, that Islamic extremism is the transcendent challenge of the 21st century?

OBAMA: I think the problems of terrorism and groups that are resisting modernity, whether because of their ethnic identities or religious identities, and the fact that they can be driven into extremist ideologies, is one of the severe threats that we face.

I don't think it's the only threat that we face.

ZAKARIA: But how do you view the problem within Islam? As somebody who saw it in Indonesia ... the largest Muslim country in the world?

OBAMA: Well, it was interesting. When I lived in Indonesia -- this would be '67, '68, late '60s, early '70s -- Indonesia was never the same culture as the Arab Middle East. The brand of Islam was always different.

But around the world, there was no -- there was not the sense that Islam was inherently opposed to the West, or inherently opposed to modern life, or inherently opposed to universal traditions like rule of law.

And now in Indonesia, you see some of those extremist elements. And what's interesting is, you can see some correlation between the economic crash during the Asian financial crisis, where about a third of Indonesia's GDP was wiped out, and the acceleration of these Islamic extremist forces.

It isn't to say that there is a direct correlation, but what is absolutely true is that there has been a shift in Islam that I believe is connected to the failures of governments and the failures of the West to work with many of these countries, in order to make sure that opportunities are there, that there's bottom-up economic growth.

You know, the way we have to approach, I think, this problem of Islamic extremism ... is we have to hunt down those who would resort to violence to move their agenda, their ideology forward. We should be going after al Qaeda and those networks fiercely and effectively.

But what we also want to do is to shrink the pool of potential recruits. And that involves engaging the Islamic world rather than vilifying it, and making sure that we understand that not only are those in Islam who would resort to violence a tiny fraction of the Islamic world, but that also, the Islamic world itself is diverse.

And that lumping together Shia extremists with Sunni extremists, assuming that Persian culture is the same as Arab culture, that those kinds of errors in lumping Islam together result in us not only being less effective in hunting down and isolating terrorists, but also in alienating what need to be our long-term allies on a whole host of issues.

ZAKARIA: If U.S. forces in Afghanistan captured Osama bin Laden, what would you do with him, and you were president?

OBAMA: Well, I think that, if he was -- if he was captured alive, then we would make a decision to bring the full weight of not only U.S. justice, but world justice down on him. And I think that -- and I've said this before -- that I am not a cheerleader for the death penalty. I think it has to be reserved for only the most heinous crimes. But I certainly think plotting and engineering the death of 3,000 Americans justifies such an approach. Watch what Obama says about bin Laden »

Now, I think this is a big hypothetical, though. Let's catch him first. And the fact that we have failed to seriously go after al Qaeda over the last five years, because of the distraction of Iraq, I think we are now seeing the consequences of that in Afghanistan.

That's not the only problem we have in Afghanistan. We have not dealt with the narco-trafficking that's taking place there. We have not provided farmers there an option beyond poppy. I think the Karzai government has not gotten out of the bunker and helped organize Afghanistan and government, the judiciary, police forces, in ways that would give people confidence.

So, there are a lot of problems there. But a big chunk of the issue is that we allowed the Taliban and al Qaeda to regenerate itself when we had them on the ropes. That was a big mistake, and it's one I'm going to correct when I'm president.

ZAKARIA: You talked about the other threats we face. In dealing with these threats, how should we approach other nations?

John McCain has talked about a new G-8, the group of the richest countries in the world, which would exclude Russia, expel Russia, and not include China. So, it would be an attempt to draw a line in the sand and cast out, as it were, the non-democracies.

Do you think that's a good idea?

OBAMA: It would be a mistake.

Look. If we're going to do something about nuclear proliferation -- just to take one issue that I think is as important as any on the list -- we've got to have Russia involved. The amount of loose nuclear material that's floating around in the former Soviet Union, the amount of technical know-how that is in countries that used to be behind the Iron Curtain -- without Russia's cooperation, our efforts on that front will be greatly weakened.

China is going to be one of the dominant economies -- already is -- and will continue to grow at an extraordinary pace. The notion that we don't want to be engaged in a serious way with China, or that we would want to exclude them from the process of creating international rules of the road that are able to maintain order in the financial markets, that are able to address critical issues like terrorism, that are able to focus our attention on disparities of wealth between countries -- that does not make sense.

Now, I think that we have to have a clear sense of what our values are and what our ideals are. I don't think that we should shy away from being straight with the Russians about human rights violations. We should not shy away from talking to the Chinese about those same subjects.

I think that we have to be tough negotiators with them when it comes to critical issues. For example, if China is not working cooperatively with us on trade issues, I think that there's nothing wrong with us being tough bargainers.

But we have to engage and get them involved and brought into dealing with some of these transnational problems. And that kind of tough, thoughtful, realistic diplomacy used to be a bipartisan hallmark of U.S. foreign policy.

And one of the things that I want to do, if I have the honor of being president, is to try to bring back the kind of foreign policy that characterized the Truman administration with Marshall and Acheson and Kennan.

But also characterized to a large degree -- the first President Bush -- with people like Scowcroft and Powell and Baker, who I think had a fairly clear-eyed view of how the world works, and recognized that it is always in our interests to engage, to listen, to build alliances -- to understand what our interests are, and to be fierce in protecting those interests, but to make sure that we understand it's very difficult for us to, as powerful as we are, to deal all these issues by ourselves.

We need to show leadership through consensus and through pulling people together wherever we can. There are going to be times where we have to act unilaterally to protect our interests. And I always reserve the right to do that, should I be commander in chief.

ZAKARIA: What about if you don't get that consensus, let's say, in a place like Darfur? You've called for a no-fly zone. But it's a U.N. no-fly zone.

OBAMA: Right.

ZAKARIA: Now, but the U.N. isn't going to have a no-fly zone, probably, because the Chinese and the Russians will probably not go along with it.

So, in that event, do you want to have a U.S. or a NATO no-fly zone? In other words, do you want to do something, even if you can't get consensus?

OBAMA: Well, look. There are going to be times where it's the right thing to do, and the consensus is not going to be perfect.

I think our intervention in the Balkans ultimately was the right thing to do, although we never got the sort of formal consensus and coalition that we were able to achieve, for example, in the Gulf War. And so, the situations are going to vary.

My point is this, that we should always strive to create genuine coalitions -- not coalitions that are based on us twisting arms, withholding goodies, ignoring legitimate concerns of other countries, but coalitions that are based on a set of mutual self-interests.

In a situation like Darfur, I think that the world has a self-interest in ensuring that genocide is not taking place on our watch. Not only because of the moral and ethical implications, but also because chaos in Sudan ends up spilling over into Chad. It ends up spilling over into other parts of Africa, can end up being repositories of terrorist activity.

Those are all things that we've got to pay attention to. And if we have enough nations that are willing -- particularly African nations, and not just Western nations -- that are willing to intercede in an effective, coherent way, then I think that we need to act, even if we haven't achieved 100 percent consensus.

But the principle of us wanting to build effective alliances with other countries and to lead in that way through persuasion and organization, I think that's something that has historically been when we are at our best.

ZAKARIA: One area where you're outside the international consensus -- and certainly, perhaps, some others -- is the statement you made in a recent speech supporting Jerusalem as the undivided capital of Israel.

Now, why not support the Clinton plan, which envisions a divided Jerusalem, the Arab half being the capital of a Palestinian state, the Jewish half being the capital of the Jewish state?

OBAMA: You know, the truth is that this was an example where we had some poor phrasing in the speech. And we immediately tried to correct the interpretation that was given.

The point we were simply making was, is that we don't want barbed wire running through Jerusalem, similar to the way it was prior to the '67 war, that it is possible for us to create a Jerusalem that is cohesive and coherent.

I was not trying to predetermine what are essentially final status issues. I think the Clinton formulation provides a starting point for discussions between the parties.

And it is an example of us making sure that we are careful in terms of our syntax. But the intention was never to move away from that basic, core idea that they -- that those parties are going to have to negotiate these issues on their own, with the strong engagement of the United States.

And if you look at the overall tenor of that speech and what I've said historically about this issue, you know, Israel has an interest not just in bunkering down. They've got to recognize that their long-term viability as a Jewish state is going to depend on their ability to create peace with their neighbors.

The Palestinian leadership has to acknowledge that the battles that they've been fighting, and the direction that they've been going in and the rhetoric they've been employing, has not delivered for their people.

And it is very hard, given the history of that region and the sense of grievance on both sides, to step back and say, let's be practical and figure out what works. But I think that's what the people of Israel and the people in the West Bank and Gaza are desperate for, is just some practical, commonsense approaches that would result in them feeling safe, secure and able to live their lives and educate their children.

ZAKARIA: You've also said that the chief beneficiary of the Iraq war has been Iran, which now poses a significant strategic threat to, or challenge to, the United States in the region.

If we were to leave Iraq entirely, would that not cede the field to them and allow Iran to consolidate its gains in the region and in the country?

OBAMA: I don't think so. Look, first of all, I have never talked about leaving the field entirely. What I've said is that we would get our combat troops out of Iraq, that we would not have permanent bases in Iraq.

I've talked about maintaining a residual force there to ensure that al Qaeda does not re-form in Iraq, that we're making sure that we are providing logistical support and potential training to Iraqi forces -- so long as we're not training sectarian armies that are then fighting each other -- to protect our diplomats, to protect humanitarian efforts in the region.

So, nobody's talking about abandoning the field.

ZAKARIA: That might be a large force.

OBAMA: Well, it -- you know, I'm going to make sure that we determine, based on conditions on the ground, how we effectively carry out those limited, temporary missions.

But what is going to prevent Iran from having significant influence inside of Iraq -- or at least, so much influence that Iraq is not functioning -- is to make sure that the government has stood up, that it has capacity, that the Shia, the Sunni, the Kurds have come to the sort of political accommodation that allows them to divide oil revenues that are now coming in quite handsomely, that ensures that, in fact, we're serious about ending corruption in some of the ministries, that provincial federalist approaches to governance are being observed.

The stronger the Iraqi government is on its own -- not with us, but on its own -- the less likely that Iran is going to exert its influence.

And again, this is -- you know this better than I do, Fareed -- the assumption that, because many in Iraq are Shia, that they automatically are going to align themselves with Iran, ignores the fact that you've got Arab and Persian cultures that are very different. And there's -- if Iraqi Shias feel that their government is actually functioning, then I think their identity as Iraqis reasserts itself.

If, on the other hand, the perception is that the government in Iraq is just an extension of the U.S. government, then sympathies for the kind of mischief that Iran has been engaged in may increase.

Now, the last point I would make on this is, this is going to be a messy affair. There's no elegant and easy solutions to what I believe has been an enormous strategic blunder by this administration.

We're going to have to work our way through it. There are going to be -- there's going to be progress in some areas. There is going to be slippage in others.

What we do have to make certain of is that, by creating a phased withdrawal in Iraq, that we are mounting the sort of diplomacy and reaching out to our allies in ways that actually strengthen our ability to isolate Iran, if it continues to pursue what are unacceptable foreign policy decisions by their leadership.

ZAKARIA: But you could imagine a situation where, if the Iraqi government wanted it, 30,000 American troops are still in Iraq 10 years from now.

OBAMA: You know, I have been very careful not to put numbers on what a residual force would look like. What I am absolutely convinced of is that, to maintain permanent bases, to have ongoing combat forces, to have an open-ended commitment of the sort that John McCain and George Bush have advocated, is a mistake. It is a strategic mistake.

It weakens our ability to go after al Qaeda in Afghanistan. It continues to fan anti-American sentiment. I think it allows Iran to more effectively engage in mischief in the region. And it prevents us from isolating them and making clear to the world that they are the authors of their own isolation by their behavior.

Those costs cannot be borne. And that's before we even start talking about the hundreds of billions of dollars and American lives that are lost or profoundly disrupted as a consequence of this engagement.

ZAKARIA: You are going to Europe and the Middle East. You know that in places like France you have 85 percent approval ratings.

Isn't that going to make some Americans very suspicious? If all of Europe likes you, if France likes you, there must be something wrong.

OBAMA: Well, I tell you what. You know, it's interesting. As I travel around the country, here in the United States, I think people understand that there has been a price to the diminished regard with which the world holds the United States over the last several years.

It's something that bothers people. It's something that's brought up.

You know, when I'm doing a town hall meeting in some rural community, invariably, somebody will raise their hand and they'll say, "When are we going to restore the respect that the world had for America?"

And, you know, the American people's instincts are good. It's not just a matter of wanting to be liked. It's the fact that, as a consequence of that diminished standing, we have less leverage on a whole host of critical issues that have to be dealt with.

So, I think the American people are ready for a president who is not alienating the world. And if that president is liked a little bit, well, that's just a bonus.

Now, I don't know how long that will last. We'll see if my approval ratings hold up after I'm president.

ZAKARIA: You're bound to disappoint people. I mean, with approval ratings that high, it's bound to be a letdown. Don't you think?

OBAMA: You know, my job is to make sure that, here in the United States, the American people feel confident that I'm going to be advocating for their interests, that I'm going to keep them safe.

The way to do that though, I believe, is to make sure that we're paying attention to the rest of the world, their hopes, their aspirations, as well, and that we're leading with our values and ideals, and not just with our military.